1. GST to boost real estate sector; here’s why

GST to boost real estate sector; here’s why

The government has fixed a goods and services tax (GST) rate of 12% for work contracts, giving the impression of a higher burden on the construction sector.

By: | New Delhi | Updated: May 20, 2017 7:14 AM
Also, the new indirect tax regime will simplify the extent convoluted tax structure by treating work contracts as only services. (Reuters)

The government has fixed a goods and services tax (GST) rate of 12% for work contracts, giving the impression of a higher burden on the construction sector. However, a closer look suggests the actual tax incidence under the GST regime would be lower than the existing one, thanks to the facility of input tax credit (ITC) on raw materials. Also, the new indirect tax regime will simplify the extent convoluted tax structure by treating work contracts as only services. At present, while the Centre effectively levies a 6% services tax on construction work contracts (after a 60% abatement), states impose a value-added tax of 1-4.5%. However, the ITC facility is unavailable on the payment of taxes on raw materials like steel and cement now on which the existing tax incidence is quite high and varies from state to state. Work contracts cover both commercial and residential infrastructure projects.

In the GST regime, though, builders will be able to get input tax credit against their payment of taxes on key inputs like steel and cement. While most of the steel products will be taxed at 18% under the GST regime, against the current indirect tax incidence of roughly 17.5%, those of cement will attract 28%, compared with around 23-24% now. “The 12% GST rate for work contract may optimally look high but since additional credits will henceforth be available, the total tax impact may be lower than the current indirect tax regime,” said Anita Rastogi, partner (indirect tax) at PwC.

Under the extant indirect tax regime, work contracts usually cover three types of taxable activities: Supply of goods (inputs), services and manufacturing. While the supply of goods attracts value-added tax (VAT), the service tax is imposed on services. If a new item is produced in the process of completing a works contract, the central excise duty is levied on that product. Sanjay Garg, partner (indirect tax) at KPMG, said the GST regime will bring in the much-needed simplification of the indirect tax structure, as work contracts will be treated only as service. Moreover, the ITC facility will reduce the cost of raw material procurement.

The cost of some of the inputs for work contracts, including steel, will be lower under the new regime, as the government has proposed a GST rate of 5% for coal (which is used in making steel and some other products), much lower than the current effective tax incidence of 11.5%, said analysts. The GST regime will reduce the cash component of the construction economy, because, to avail of ITC, the raw materials have to be sourced from GST-registered vendors. This will lead to greater tax compliance.

  1. G
    Gopala krishna
    Jun 26, 2017 at 4:34 pm
    Input tax credit will be only Rs20 per sqft,builder says. Tax is increased from 6 to 12 afer GST. So.it is a huge burden to home loan .
    Reply

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